Foreign Exchange Risk Management and Financial Performance of Manufacturing Firms in Kenya

Foreign exchange risk management is an important consideration for manufacturing firms operating in an increasingly globalised business environment. Exchange rate fluctuations can affect the cost of imported raw materials, machinery, fuel, and other production inputs, thereby influencing profitability, liquidity, cash-flow stability, and overall financial performance. This study examines the effect of foreign exchange risk management on the financial performance of manufacturing firms in Kenya through a review of theoretical and empirical literature. The theoretical review is anchored on the International Fisher Effect theory, the Theory of Rational Expectations, and the Purchasing Power Parity theory, which explain the factors influencing exchange rate movements and firms’ responses to currency-related uncertainties. The literature review methodology involved examining relevant scholarly publications, including empirical studies conducted in Kenya and other international contexts. The reviewed literature focuses on financial hedging practices, including forward contracts and currency swaps, as well as operational strategies, such as exposure netting and natural hedging, and non-financial approaches, including pricing adjustments and supplier negotiations. The reviewed studies generally indicate that foreign exchange risk management practices are associated with improved financial outcomes through reduced currency exposure, enhanced cash-flow stability, and improved profitability. However, the effectiveness of these practices may vary depending on firms’ foreign currency exposure, financial resources, managerial capabilities, and prevailing macroeconomic conditions. The study recommends that manufacturing firms adopt integrated foreign exchange risk management strategies, strengthen exchange rate monitoring and forecasting, develop formal risk management policies, and invest in managerial capacity. Further empirical research is necessary to establish the relationship between specific foreign exchange risk management practices and financial performance across different manufacturing subsectors in Kenya.